Quick answer
An impairment assessment determines whether an asset’s carrying amount is supported by the economic benefits or cash collections expected from it. When the applicable test shows the recorded amount is too high, an impairment loss reduces the asset or a related allowance.
Accounting does not leave an asset at an amount that the governing measurement model no longer supports. An assessment compares what is recorded with the amount supported by recoverability evidence. The exact comparison is not universal—receivables, inventory, PP&E, investments, intangibles, and goodwill use different framework tests.
Impairment indicators and assessment outcomes
External evidence can include falling market values, adverse technological or economic change, and higher market interest rates. Internal evidence can include damage, obsolescence, restructuring, worse-than-expected performance, or plans to idle or dispose of an asset. An indicator triggers analysis; it does not by itself set the loss. The test starts from the carrying amount—the reported amount after accumulated depreciation, amortization, or an allowance—so those measurements must be brought up to date first.
Asset-specific impairment tests
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| Asset | Central question | Typical accounting result |
|---|---|---|
| Receivables | How much of the contractual cash is expected to be collected? | An allowance reduces the receivable’s net carrying amount. |
| Inventory | Does net realizable value still support recorded cost? | A write-down reduces inventory and profit. |
| PP&E | Do the applicable recoverability measures support the asset or asset group? | An impairment loss reduces the carrying amount used for future depreciation. |
| Goodwill | Does the applicable test support the goodwill assigned to the tested unit? | A loss reduces goodwill; under IFRS, it cannot later be reversed. |
These models share a concern about overstated assets, but they differ in timing, unit of account, measurement, allowance presentation, and whether a later recovery can reverse the loss.
IFRS and ASPE impairment models
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| Stage | IFRS IAS 36 | ASPE Section 3063 |
|---|---|---|
| Trigger | Indicators; regular tests also apply to specified assets | Indicators |
| Unit tested | Individual asset or cash-generating unit | Asset or asset group with largely independent cash flows |
| Initial comparison | Carrying amount against recoverable amount | Carrying amount against undiscounted cash flows |
| Loss | Excess over recoverable amount | Excess over fair value after the recoverability test fails |
| Reversal | Permitted for qualifying assets other than goodwill, within a ceiling | Prohibited within Section 3063 |
ASPE long-lived assets and goodwill
For PP&E and finite-lived intangibles held for use, ASPE Section 3063 starts with indicators. The asset or asset group is not recoverable when carrying amount exceeds the undiscounted cash flows expected from use and eventual disposition. Undiscounted means adding those future amounts without reducing them for the wait until receipt. If that first test fails, the impairment loss is carrying amount less fair value. The reduced amount becomes the new cost basis, and the loss is not reversed.
ASPE Section 3064 uses separate models for indefinite-lived intangibles and goodwill. Those assets are tested on indicators using fair value; goodwill is assessed at the reporting-unit level after other applicable assets and its loss is capped at the goodwill assigned to the unit. Neither loss is reversed. Inventory and financial assets remain outside these models and follow Sections 3031 and 3856.
ASPE recoverability contrast
An asset group has a $48,000 carrying amount, $50,000 of estimated undiscounted cash flows, and a $39,000 fair value. Under Section 3063, $50,000 exceeds $48,000, so the group passes the recoverability test and no impairment is recorded. If the undiscounted estimate were instead $45,000, the test would fail: the loss would be $48,000 − $39,000 = $9,000, measured using fair value rather than the $45,000 cash-flow estimate.
Recoverable amount under IFRS
For non-financial assets within IAS 36, recoverable amount is the higher of value in use and fair value less costs of disposal. Value in use reflects discounted future cash flows from continuing use and ultimate disposal. Fair value is a current market-based exit price: the amount market participants would pay for the asset in an orderly sale at the measurement date. Fair value less costs of disposal subtracts the incremental costs of that sale. The higher amount matters because an entity can recover an asset through either use or sale.
An IFRS cash-generating unit (CGU) is the smallest identifiable group of assets that generates cash inflows largely independent of other assets. A machine that works only as part of one production line is tested within the smallest group that generates those independent inflows rather than on its own. Goodwill is allocated to the unit or group of units expected to benefit from the combination. Certain assets, including goodwill and indefinite-life intangibles, require regular testing even without a fresh adverse indicator; other assets are generally tested when indicators exist.
Recognizing an impairment establishes a new carrying amount for later depreciation or amortization. Future expense is based on that revised amount, the remaining useful life, and any residual value. If conditions later improve, IFRS reassesses an impaired asset other than goodwill, but any reversal is capped at the carrying amount the asset would have had if the loss had never been recognized. Goodwill impairment is not reversed under IFRS.
Present value expresses future cash flows as an amount at the measurement date. A discount rate translates future cash flows into that equivalent amount by reflecting the time value of money and relevant risks in the rate. A multi-year estimate discounts each year’s cash flow for the time until it is expected.
Translate a future receipt into present value
Assume $105 will be received in one year and the appropriate annual discount rate is 5%. Its present value is $105 ÷ 1.05 = $100: the amount today that would grow to the future receipt at that rate.
Derive recoverable amount, then follow the asset forward
Coastal Packaging applies IFRS. At December 31, 20X2, reduced demand is an impairment indicator for a machine that produces largely independent cash inflows. Cost is $90,000 and accumulated depreciation before impairment is $42,000. A market valuation supports $39,000, with $2,000 direct disposal costs. Management’s supportable discounted cash-flow estimate for continued use is $40,000. The machine has four years of remaining useful life, no residual value, and straight-line depreciation.
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| Measure | Calculation | Amount |
|---|---|---|
| Carrying amount | $90,000 − $42,000 accumulated depreciation | $48,000 |
| Fair value less costs of disposal | $39,000 − $2,000 | $37,000 |
| Value in use | Supported present value of cash flows | $40,000 |
| Recoverable amount | Higher of $37,000 and $40,000 | $40,000 |
| Impairment loss | $48,000 − $40,000 | $8,000 |
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| Account | Debit | Credit |
|---|---|---|
| Impairment Loss | 8,000 | |
| Accumulated Impairment Losses — Machine | 8,000 |
Financial-statement effect
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| Statement | Account | Effect | Timing |
|---|---|---|---|
| Income statement | Impairment Loss | Expense increases by $8,000 and profit decreases | 20X2 |
| Balance sheet | Machine | Carrying amount falls from $48,000 to $40,000 | December 31, 20X2 |
| Cash flow statement | Impairment entry | No cash moves when the loss is recorded | Assessment date |
- Income statement
- AccountImpairment Loss
- EffectExpense increases by $8,000 and profit decreases
- Timing20X2
- Balance sheet
- AccountMachine
- EffectCarrying amount falls from $48,000 to $40,000
- TimingDecember 31, 20X2
- Cash flow statement
- AccountImpairment entry
- EffectNo cash moves when the loss is recorded
- TimingAssessment date
Future depreciation uses the revised $40,000 carrying amount: $40,000 ÷ 4 years = $10,000 a year. Without the impairment it would have been $12,000, so the loss changes later expense as well as the current balance sheet.
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| Account | Debit | Credit |
|---|---|---|
| Depreciation Expense | 10,000 | |
| Accumulated Depreciation — Machine | 10,000 |
Suppose conditions improve at the end of 20X3 and recoverable amount is $35,000. After depreciation, carrying amount is $30,000. The amount the machine would have carried without the 20X2 impairment is $36,000 ($48,000 less $12,000 depreciation), so an IFRS reversal is limited to the lower ceiling: $35,000. The permitted reversal is $5,000.
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| Account | Debit | Credit |
|---|---|---|
| Accumulated Impairment Losses — Machine | 5,000 | |
| Impairment Recovery | 5,000 |
Reversals and write-offs
Goodwill impairment is never reversed under either framework, because a later increase may reflect newly generated goodwill rather than recovery of the purchased amount. Where reversals are allowed—IFRS assets other than goodwill, and ASPE financial assets and inventory—they are capped at the amount the asset would have carried without the earlier loss.
An impairment reduces an asset the entity still uses or expects to collect. A write-off removes a specific amount once the evidence no longer supports keeping it in the records.